A. Assuming your firm purchases Company Z, what is the amount of loan that Company Z will take out at the time of purchase?

B. Why did Company Z take out this loan?

--Not enough information is provided to answer this question.

--To payoff the firm's existing debt.

--To provide cash for the new owners to withdraw as dividends.

--The loan was taken out inappropriately. My PE firm should have taken out the loan.

--To partially pay the the amount required to purchase the firm from its existing owners.

C. How much of Company Z's purchase price will your PE firm pay from its own funds?

Introduction Company Z is a profitable, debt free entity, operating in steady-state forever. Your PE firm is considering buying it, at the asking price of: $150 MM. Your firm believes that an optimal capital structure for the firm would be: 40% D/(D+E). If your firm buys company Z: - You will pay (1-D/(D+E))% of the purchase price with your firm's funds. - Have the firm take out a loan at the moment of close, to pay the current owners the rest of the purchase price. - Your firm will operate company Z in its recapitalized steady-state forever. (Lucky you!). Given Constants IRF 4.00% 7.00% 1.20 1.72 Bu (with no debt) BL (as recapitalized) Financing Structure D+E = CAP Tot D/(D + E) = wo Existing As purchased $150 $150.0 0.0% 40.0% $0.0 $150.0 Key Rates ro Existing As purchased 6.75% 7.25% 35.00% 35.00% 7.60% Income Tax rate Free Cash Flows FCFE Income Statement Revenue - Depreciation - Other Expenses = EBIT -Interest =EBT - Tax = NI FCFE = Existing As Purchased $88.00 $88.00 ($30.00) ($30.00) ($40.00) ($40.00) $18.00 $18.00 $0.00 $18.00 ($6.30) $11.70 Introduction Company Z is a profitable, debt free entity, operating in steady-state forever. Your PE firm is considering buying it, at the asking price of: $150 MM. Your firm believes that an optimal capital structure for the firm would be: 40% D/(D+E). If your firm buys company Z: - You will pay (1-D/(D+E))% of the purchase price with your firm's funds. - Have the firm take out a loan at the moment of close, to pay the current owners the rest of the purchase price. - Your firm will operate company Z in its recapitalized steady-state forever. (Lucky you!). Given Constants IRF 4.00% 7.00% 1.20 1.72 Bu (with no debt) BL (as recapitalized) Financing Structure D+E = CAP Tot D/(D + E) = wo Existing As purchased $150 $150.0 0.0% 40.0% $0.0 $150.0 Key Rates ro Existing As purchased 6.75% 7.25% 35.00% 35.00% 7.60% Income Tax rate Free Cash Flows FCFE Income Statement Revenue - Depreciation - Other Expenses = EBIT -Interest =EBT - Tax = NI FCFE = Existing As Purchased $88.00 $88.00 ($30.00) ($30.00) ($40.00) ($40.00) $18.00 $18.00 $0.00 $18.00 ($6.30) $11.70